The past few weeks have been rather painful for EUR/USD buyers but it seems like things are finally taking a turn for the better. Ironically, this is all coming after hotter-than-expected US inflation data from the CPI and PPI reports this week. Yet, that is helping to give EUR/USD a lift as it pushes to 1.1260 today – the highest in a little over a week.
The immediate reaction to the US CPI report on Wednesday saw the pair fall to a low of 1.1114 before staging a meaningful rebound in the past few sessions. And with that, the technical picture is also starting to look more encouraging for buyers.
Of note, EUR/USD has managed to climb back above both its 100-hour (red line) and 200-hour (blue line) moving averages for the first time in five weeks. That marks a significant shift in near-term momentum, especially considering how the two key levels have repeatedly capped upside attempts throughout the recent decline.
But before getting too excited about a further run to the upside, there’s still some work to be done.
For one, buyers are now contesting resistance from the 23.6 Fib retracement level of the swing lower from August to October, at around 1.1254. A firm break above that will then draw in the swing highs from earlier this month around 1.1275-80 next. And after that, there is the region around 1.1340-50 to tackle with the 38.2 Fib retracement level at 1.1341 sitting thereabouts.
The pair definitely does look like it wants to come up for some air, but there’s plenty of technical hurdles to get through before convincing of a stronger shift in trading sentiment. As things stand, I’d argue that what we are seeing looks more like a breather for the euro rather than a decisive trend reversal.
And why is that you might ask? Well, it is all on the bond market.
The sharp retreat in Treasury yields from their recent highs has definitely helped to take some pressure off the pair as the dollar also slides back a little. But with 10-year yields still hovering above 5%, the underlying macro backdrop hasn’t exactly changed. Inflation remains stubborn for the most part and another push higher in yields could easily spoil the recovery in EUR/USD.
Besides that, Europe isn’t free of its own troubles either. The fiscal worries in France remain a lingering threat, particularly if the French-German yield spread starts widening again. It is keeping at around 138 bps today, not too far away from the 150 bps high from two weeks ago. If things heat up again, that could quickly put renewed pressure on the single currency.
Taking all of that into consideration, the charts appear to be giving the euro some breathing room to work with for the time being. But at the end of the day, the bond market is the one that will have the final say on whether the rebound can turn into something more constructive.
This article was written by Justin Low at investinglive.com.